Who Owns Your Life Insurance Policy?

If you take out a life insurance policy, the cash it produces when you die becomes part of your taxable estate. If everything you own — house, insurance proceeds, pension assets and so on — total less than $600,000 (gradually rising to $1 million over the next few years), no estate tax will be due. But beyond that, the tax is heavy.

If you’re leaving everything in excess of $600,000 to your spouse (or to charity), no estate tax will be due, either. But when your spouse dies, estate tax may well be due.

So if you’re trying to leave some money to your kids, here’s what you can do: set up an irrevocable trust and have it apply for the life insurance (or transfer ownership of an existing policy into it, at least three years before you die). When you die, the life insurance proceeds go to fund the trust, and no estate tax is due. You might set up the trust to pay your spouse an income while she’s alive and then be distributed to your kids.

Speak with a trust and estates attorney for the details, and to be sure what I’m saying applies to you. But for people who have appreciable assets, this issue of “who should own the life insurance” is a basic estate-planning question to consider.